Mexico Autos Report Q4 2009

The Mexican auto industry has seen a double whammy affect from the slackening US demand and the outbreak of swine flu; the latter of which has led to fewer working days and lower business activity over April-May. As BMI examines in its Q4 Mexico Autos Report, these have left little for the carmakers to fall back on, given that the fall in exports has now been coupled with a 31% y-o-y fall in domestic sales between January and May this year.

In view of these demand conditions, carmakers produced 42% fewer vehicles, to 500,383 units over 5M09, prompting the government to consider supply-side support to the industry. BMI believes that the strategy made sense given that the export-oriented nature of Mexico's auto production. However, in July, Mexican President Felipe Calder??n announced a nationwide scrappage scheme with the twin objective of bolstering domestic vehicle demand and encouraging increased production in the country.

The MXN500mn (US$37.5mn) scheme will offer MXN15,000 (US$1,130) to buyers exchanging a car over 10 years old for a new vehicle costing up to MXN160,000 (US$12,016).

BMI highlights that negative consumer perceptions of economic conditions, rising interest rates on loans and lack in the availability of credit have kept potential customers holding up on new purchases thus far. With a real GDP growth forecast to -5.5% for this year, we therefore maintain our autos sales forecast of a 15% y-o-y fall, to 897,800 units this year. When some consumer confidence is restored towards the beginning of 2010, total sales could in fact grow at a positive rate of up to 5% by end- 2010. Meanwhile, production, which has been almost entirely dependent on the US demand for as much as 65% of its total output, is likely to drop by 20% y-o-y to 1.73 units by end-2009. The industry is expected to draw temporary relief from the inflated vehicle demand from the US as a result of the 'Cash for Clunkers' programme passed by the US government. Nevertheless, growth beyond 2010 is expected to be fairly steady, reaching 2.18mn units by 2013, having recovered completely from its crisis levels.

Mexico's relatively developed market poses limitations on the potential returns carmakers may obtain from their investments in the markets. Moreover, its has relatively low levels of growth potential for output and sales meaning that the market lags behind Brazil and Argentina putting it on the fourth position in BMI's Business Environment Rankings for the autos industry in North and Latin America.

Therefore, much depends on how quickly Mexico recovers from the ongoing economic crisis and lessens its dependence on the US to boost its future potential.